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Carlsberg CEO has a warning for his peers about negative rates

The man running Carlsberg A/S says he won't be "seduced" by negative interest rates as others take advantage of historically cheap credit to pay for expansion.

PHOTO: BLOOMBERG

[COPENHAGEN] The man running Carlsberg A/S says he won't be "seduced" by negative interest rates as others take advantage of historically cheap credit to pay for expansion.

Cees 't Hart, the chief executive officer of the Danish brewer, says the worry is that companies that succumb to the temptation to issue debt just because it's cheap could end up with balance sheets they can't afford.

"The moment you get seduced by low rates and companies feel like they have to use them to do very big things -- maybe bigger than they can absorb -- they have to remember they all have to pay the bill later," Hart said in a phone interview.

"There are many companies that have been a lot more aggressive than we have who have then gotten into problems afterwards," he said.

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Globally, almost US$17 trillion of bonds now trade at negative yields as investors have fled risk. Nestle SA on Aug. 13 became the first company to have 10-year euro debt yielding below zero. In Carlsberg's home country of Denmark, which has the world's largest covered-bond market, a bank made history this month when it offered the first ever 10-year mortgage at a negative rate.

Since Mr Hart joined Carlsberg in 2015, the company has focused on cutting its debt and reducing costs, a strategy that has included abstaining from major acquisitions. Meanwhile, competitors like Anheuser-Busch InBev NV have gained market share after a series of big takeovers over the past decade. The last time Carlsberg spent a large sum on a takeover was when it bought Scottish & Newcastle Plc in 2008 for roughly US$8.5 billion, under Hart's predecessor.

"Carlsberg has lowered its leverage significantly in recent years," Brian Borsting, a credit analyst at Danske Bank, said in a note. The brewer's decision last week to extend its share buyback program is "slightly credit negative" but it also "indicates that Carlsberg doesn't plan larger bolt-on acquisitions near term," he said.

What Bloomberg Intelligence Says:

"Carlsberg can invest its cash flow in M&A, having stabilized its balance sheet, restored the dividend payout to 50per cent and initiated a 4.6 billion-kroner share buyback program. Add-on deals wouldn't breach its 2x net debt-to-Ebitda ratio target, while a strategic tie-up with Habeco would double net debt, but boost growth, if it succeeds."----Duncan Fox, consumer products senior industry analystClick here to view the research

Carlsberg, which in June sold 10-year bonds at a 0.875per cent coupon, has net debt of 1.33 times its Ebitda, down from a gearing level of 2.74 times in 2014. The CEO said he'd like that ratio to stay at around 1.5 times. "We want to be a bit conservative."

While Mr Hart won't pursue large takeovers at the moment, he said he's still interested in increasing Carlsberg's stake in Hanoi-based Habeco. Talks with the Vietnamese government have been on for some years now.

"When we're talking about Habeco we can easily finance that ourselves" using cash flow, the CEO said. "Of course, at the moment rates are low and that makes things easier, but the thing with interests rates is that they can go up as well again."